What is a Large Cap?
Generally speaking, large cap companies have at least $8 billion of market capitalization.
How Does a Large Cap Work?
Market capitalization refers to the value of a company's outstanding shares. The formula for market capitalization is:
Market Capitalization = Current Stock Price x Shares Outstanding
It is important to note that market cap is not the same as equity value, nor is it equal to a company's debt plus its shareholders' equity (although that too is sometimes referred to as simply the company's capitalization).
Let's assume Company XYZ has 10 million shares outstanding and the current share price is $9. Based on this information and the formula above, we can calculate that Company XYZ's market capitalization is 100 million x $90 = $9 billion. Company XYZ is a large cap stock.
Why Does a Large Cap Matter?
Many investors regard large cap stocks as more mature and more stable. Accordingly, they are often attractive to conservative investors and income investors. However, capitalization reflects the theoretical value of a company, not what the company could be purchased for in a normal merger transaction. One reason for this is that the value of material nonpublic information, management changes, operating synergies between the acquirer and the company, and other intangible factors may not be reflected in the stock price or the financial statements.
